Market-linked Debentures

Grow your wealth with Market-linked Debentures (MLD) by earning potential returns. The high-return prospects of this avenue make it a must-have investment option for many. Their returns are linked with market conditions, particularly to the indices associated with them.

 

Unlike other debt instruments that offer regular returns, MLDs pay returns at maturity. The duration of these debt instruments ranges from 1 year to 5 years.

As an investor, you can enjoy the following features by purchasing market-linked debentures in India:

• MLDs are regulated by the Securities and Exchange Board of India (SEBI)

• MLDs are non-convertibles, which means that you cannot convert them into equity shares

• MLDs’ performance depends on the performance of the underlying assets

• The minimum amount that you invest in this bond is ₹1 Lakh, brought down from ₹10 Lakhs by SEBI w.e.f. January 1, 2023

• Various credit agencies, such as CRISIL and ICRA, rate MLDs, helping you choose high-quality instruments that have a lower risk of default

• MLDs do not make regular interest payments like other debt securities

• The principal amount and accrued interest are receivable only at maturity

There are two types of market-linked debentures in India:

Principal Protected

This type of MLD is one that guarantees a blend of fixed-income and market-associated returns. Simply put, you will receive the principal sum invested in this bond. It will also include the interest accrued at a lower rate, as compared to other market-linked securities.

Non-principal Protected

Non-principal protected market-linked debentures (NPP-MLD) offer higher returns, unlike the former. However, they also hold a greater risk of capital loss during adverse market conditions. 

MLDs do not offer regular interest payments like traditional bonds. Instead, their returns are linked to the performance of an underlying market index or benchmark, such as the Nifty 50 or Sensex.

 

The returns are calculated based on a predefined formula specified in the MLD's terms and conditions. This formula determines the payout to the investor at maturity. In short, MLDs allow investors to participate in market upside while having some level of principal protection.

 

They also carry unique risks that need to be carefully evaluated before investing. The returns are linked to the performance of the underlying market index rather than being fixed. 

 

Consider the following hypothetical example to understand this concept better. Say a company issues an MLD linked to the Nifty 50 Index with the following parameters.

• Face value of the MLD: ₹10 Lakhs

• Maturity period: 3 years

• Participation rate: 120%

• Minimum return: 6% p.a.

 

Note: The participation rate determines how much of the underlying market's performance is credited to your investment, 

 

In such a scenario, the MLD returns are calculated in the following way:

• The Nifty 50 level is recorded on the issue date as the initial level

• On the maturity date after 3 years, the final Nifty 50 level is recorded

• The percentage change in Nifty 50 from initial to final level is calculated

• If the Nifty 50 has increased, the investor gets 120% participation in the upside

• If Nifty 50 falls, the investor gets the minimum guaranteed return of 6% p.a.

• The return is paid as a lump sum at maturity

Previously, the market-linked debenture taxation stood at 10% if held for more than a year. However, the Union Budget 2023 proposed taxes on these securities as per your tax slab rates, irrespective of the period of holding. This taxation rule is applicable for both listed and unlisted MLDs.

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